Pop Quiz: Which company out of Woolworths Limited (ASX: WOW), Coca-Cola Amatil Ltd (ASX: CCL) and Rio Tinto Limited (ASX: RIO), has outperformed the S&P/ASX200 (INDEXASX: XJO) over the past five years?
The answer: None.
Woolworths' share price has only marginally underperformed (and would be ahead when dividends are included), but remembering five years ago share prices were recovering from the GFC, the returns from these three have been less than great.
Given the choice, I probably would rather buy a low-cost index fund and save myself the hassle of finding, researching and risking my money in individual shares. That's why our goal, here at The Motley Fool Australia, is to beat the market.
Woolworths, one of two Australian supermarket giants, is an excellent business but will only be an excellent investment, if an investor can pay the right price. Sure, it's a dominant Australian retailer but it appears the market is placing too high a price on the stock given its growth outlook and dividend yield. Woolies already has a huge market share of the groceries, liquor and discount retail market, therefore I expect earnings per share growth of around mid-single digits (per annum) in coming years. Trading on approximately 18 times trailing earnings per share, Woolies is not cheap.
Shareholders in Coca-Cola Amatil have, so far, had a year they'd rather forget, falling 25% since January 2. At $9.00 per share the stock appears cheap but giving its inability to match the index over the past decade, looks could be deceiving. I have said on a number of occasions CCA's new boss, Alison Watkins, has her work cut out in coming years, if she is to restore investors' faith in the company. I remain cautious about CCA's ability to outperform the market even from here, and have very limited exposure to the stock (see my disclosure below).
Lastly, Rio Tinto is one blue-chip stock I think is worth a second look. Despite a falling iron ore price – which accounts for 90% of the company's earnings – Mr Market could be pricing the stock too cheaply. I believe CEO Sam Walsh has the ability to drive further costs out across the group, pay bigger dividends to shareholders and grow the Aluminium, Copper and Energy divisions in coming years.
Our #1 dividend stock idea – Yours FREE!
